Stanley Fischer, the Governor of the Bank of Israel, appears to be in great demand. The former MIT and Chicago professor of International Economics and the First Deputy Managing Director of the International Monetary Fund (IMF) during the Clinton administration had written a seminal paper of current relevance in the spring 2001 issue of the Journal of Economic Perspectives about the mission of the IMF since the United States left Bretton Woods in 1971.
The world was moving to floating exchange rates under the guidance of the G7 countries using the U.S dollar as the de facto anchor. Fischer had argued, implicitly assuming the dollar anchor, the move from fixed to floating exchange rates had to be done with perhaps a short stop somewhere in the middle during that transition. The currency for the peg was, of course, the U.S dollar. The euro was itself new in 2001.
The economic reality today is the overwhelming perception that the dollar anchor itself is stumbling, dislodging the ship of the global economy in the rough waters of the high seas. What should the dollar then transition to?
Economic policy makers in the United States were initially pre-occupied with foreign U.S dollar holdings to avert perhaps hostile attacks on U.S assets or against U.S interests. They wanted the money back, no more than give or take a few billion around the approximate total of $3 trillion in all, the so called sovereign wealth funds (SWF) as investments to recapitalize the U.S financial markets.
It was a non-win, competing objective with the domestic interests of the foreigners holding the dollars because their economies themselves were in decline. They would rather bail themselves out first before having to support the U.S financial markets and this is what they had done and are continuing to do. The need for cash, however, has not abated in the rest of the world. And the dollar still reigns supreme. Meaning, the anchor is not wobbling, except in the minds of the people. This is where psychology is truly applicable, not with the pocket books of U.S consumers.
The rest of the world, including Europe, has still many years to go before it can comfortably replace the prominence of the U.S dollar without inflicting harm to themselves in that process. In fact, the success of the U.S dollar as an anchor in the context of Stanley Fischer’s paper depends on other countries floating fast for which they need to become fundamentally stronger economies fast. Therefore, first hardening themselves or increasing their resiliency to shocks to eventually be able to float was the lesson learned by 2001 by the IMF, the United States and the rest of the G7.
For Europe, consisting of many small economies, economic regionalism helped to move in that direction. It could also help for other similar economies around the world. China, India and other large economies do not need regionalism to the extent that the EU had needed it.
The application of economic regionalism, therefore, matters. And this is also the way out for the new G20, not dollar purchases by other countries to artificially raise its value for a short period of time to protect themselves. In fact, what they need more is dollars and what the United States needs less is its outstanding debt. It is a nice win-win.
The issue then becomes what do we do with all those dollars? Schools, hospitals, roads, rail, government institutions, investments to decrease dependence on fossil fuels and so on, around the world, including in the United States, motivated by government incentives through conducive fiscal policies such as tax cuts, not tax increases, and private investment that leverages those favorable policies. The dollar anchor is not a liability because it can be an asset.